Most fund managers have no appetite for it, he says.

Yet large private investors — and one listed fund — are making a killing in this market. And making a dent in the huge shortage of affordable housing.

Catalyst fund managers also abandoned an attempt to listed Habitat, a similar fund, in 2003. Seven years later, at the Investment Property Databank conference two weeks ago, institutional investors were giving the same reasons for avoiding residential property.

“What happens if we have 10000 flats and all our tenants decide not to pay their rent?” Craig Hallowes, director of listed property fund Pangbourne, asked the audience. “Our main concern is the reputational risk of investing in residential,” said Old Mutual Properties research manager Phil Bartram.

Fund managers rejected Habitat mainly because its capitalisation rate or forward listing yield was about 11% and they could get nearly that investing in commercial property. But elsewhere in the world, residential property funds tend to be valued at the same or lower rates than commercial ones. Investors rate them as low risk because of their many tenants and annual leases.

Shares in the third- biggest US listed property fund, Equity Residential, are giving a current yield of 3,6%. “Generally, residential yields are currently around 4% with 5%-8% vacancies and priced for strong growth,” says Catalyst’s Zayd Sulaiman. “Commercial property is 5% with 10% vacancies.”

“The perception here is that residential should be two to three percent higher than commercial,” says Leissner. “But the other reason they are reluctant to invest is that the fund has to start on a small scale and they are worried about the liquidity.” The more complex management is another concern.

But large investors in SA residential property are getting returns ranging from 8,5% forward to 13%. Perhaps the biggest is the Wapnick family’s private vehicle, City Properties, which shares properties with their two listed funds, Premium and Octodec. The vehicle owns well over 5000 flats in Pretoria and Johannesburg. “About 30% of Premium’s income comes from residential investment,” says chairman Alex Wapnick. “There’s an oversupply because of so many new properties coming onto the market and our initial yield on new stock is about 8,5%.” That’s the same as the listed sector is priced at.

Renney Plitt, COO of Affordable Housing, a company with a R1,5bn, 4500-unit portfolio mainly in the Johannesburg CBD, agrees that there’s an oversupply but says he and other investors are still getting minimum initial yields of 13%. “And we’re letting 200 units a month, so we’ll be full soon,” he says.

US private equity fund International Housing Solutions (IHS), with a fund of $240m (R1,7bn), is investing in the Johannesburg CBD and Soweto with local partners and targeting a 25% internal rate of return over five years. “For every unit rented, there are 10 people ready to sign a lease,” says IHS executive Pamela Lameraux.

These investors are the main providers of rental accommodation today. If the large funds entered the market they would not only be making money but act as an exit strategy for developers creating desperately needed homes.

“Institutions and fund managers have no idea what is going on in this sector,” says Plitt.